Martín Guzmán, who as Argentina’s minister of economy from 2019 to 2022 managed a sovereign debt crisis and the second-largest debt restructuring in history, was joined by SIPA Professor Joseph Stiglitz on March 29 to discuss the surge of global debt, especially across the Global South. They two economists proposed a set of solutions to address looming debt-trap issues in the global economy.
They emphasized the role of the International Monetary Fund (IMF) in improving debt sustainability analysis practices and revising interest rate policies to strengthen debt dynamics for economic and social development. This could help mitigate the Federal Reserve’s post-pandemic stance that poses substantial risks for emerging markets with high debts.
“The Federal Reserve had a very misguided policy,” Stiglitz said. “Keeping interest rates low for a long while and later raising them will obviously cause lots of problems everywhere.”
Stiglitz, who won the Nobel Prize in Economics in 2001, outlined three main effects of increases in interest rates—countries more in debt have to pay more interest, the dollar’s appreciation while debtors’ currencies depreciate, and a slowdown in the global economy. These effects disproportionately impact developing countries and increase their likelihood of debt distress.
“Finance is important,” he added, “but if you overborrow, then you lose more than you gain because part of avoiding a debt crisis is not borrowing too much. Governments need to focus more on raising domestic saving rates.”
The international financial architecture needs a multinational system for sovereign debt restructuring based on principles as those approved by the UN General Assembly in 2015.
— Martín Guzmán
Part of the problem is the complexity of the composition of private creditors, including a range of hedge funds, some of whom have conflicts of interest, or make money on defaults and are thus perversely incentivized to, as Stiglitz pointed out, “see the whole system fail.”
Argentina experienced this kind of debt crisis firsthand. According to Guzmán, “the dispute with the ‘vulture funds’ highlighted key deficiencies in the ‘no-system’ for sovereign debt crises resolution,” which led to stronger collective action clauses that “were tested for the first time in Argentina's 2020 debt restructuring”—which Guzmán, as minister of economy, oversaw.
He says that such safeguards “help but are not enough to provide appropriate conditions for effective restructuring processes for the restoration of debt sustainability,” adding that “the international financial architecture needs a multinational system for sovereign debt restructuring based on principles as those approved by the UN General Assembly in 2015.”
Other contributing factors to the global debt distress are the COVID-19 pandemic, the Russian invasion of Ukraine, and climate change, which has also been posing a disproportional threat for many countries already being impacted by debt distress.
This trifecta of threats has large impacts on the global financial system. As lenders and borrowers do a debt sustainability analysis, it is framed around the probability a country can repay it and often fails to take into account climate shocks such as cyclones or droughts that could negatively impact this repayment schedule.
“When you do debt sustainability analysis,” said Stiglitz, “it’s framed with a high probability that you’ll be able to repay. But [that] has to take into account that you won’t have big negative shocks, like cyclones and floods. That’s changing rapidly, and debt sustainability analysis hasn’t adapted to take that into account.”
Guzmán, who is also SIPA’s William S. Beinecke Visiting Professor of Public Policy, emphasized the need to move toward a system where carbon emissions are penalized. He added that this might “put tight constraints in countries that are developing slower” which could contribute to the creation of more global inequalities.